Vanguard was able to stand out in 2009 despite -- or perhaps because of -- a difficult market environment.
In 2009, the Malvern, Pa., fund giant significantly increased its assets under management by 30%, or $93 billion; introduced equity products outside its traditional index sphere; and expanded distribution internationally, according to William McNabb, the company's newly appointed chairman, who still retains the titles of president and chief executive officer.
"This downturn was devastating on a lot of fronts, but we were pretty well-positioned and were able to anticipate at least some of it," he said. "We found ourselves in a good position to deal with the bumpy environment."
Vanguard's plan to stay on top in 2010 is to continue to introduce products. It plans to enhance its array of actively-managed funds by launching a pair of products, a small-cap value and a mid-cap value product, in February or March.
Vanguard also plans to introduce more exchange-traded funds in 2010, McNabb said. Exchange-traded funds accounted for $25 billion of the company's $93 billion in total inflows through Nov. 30.
"ETFs are not really a separate thing for us," McNabb said. "We see this as another way to index and an opportunity to take the low-cost diversified story to another audience. ETFs are finding wider and wider appeal."
The company also plans to increase its distribution globally. Currently, less than 10% of the company's assets are held outside of the United States. McNabb won't set a goal for growth of its international business, but the company plans to introduce more international products to add assets, including potentially some new ETFs in Australia. In 2009, Vanguard opened an office in the United Kingdom and a series of international funds.
Vanguard has also developed some of the "less sexy" areas of its business connected to asset management, including its servicing side and its website, McNabb said. "We have to continue to enhance and evolve some of our hidden strengths," he said. "I guess the website is not so hidden, considering we have hundreds of thousands of logons daily, but we wanted to make a huge investment in it this year so we can continue to generate that kind of traffic next year."
McNabb said Vanguard also continues to emphasize online communications in these volatile times.
Geoffrey Bobroff, president of Bobroff Consulting in East Greenwich, R.I., said traditionally, after a decade in which equity investments slump, the sector will rally, but if Vanguard continues to invest in its actively managed products and its 401(k) business, it can profit from any market environment.
"I think one lesson that has been reinforced during the crisis is that boring works," he said. "It is not terribly sexy to talk about low-cost diversification and a balanced approach, but those kinds of portfolios have held up the best, and those principles have been reinforced more than any other time in my career. It doesn't generate a lot of chatter at a cocktail party, but we are profiting from those principles in spite of the environment."
Vanguard has increased its assets under management 30% to $1.3 trillion in the past year. It has attracted $93 billion in new assets in the first 11 months of this year for its second strongest year of inflows in the company's history. In 2007, it brought in $104 billion in assets. According to Morningstar, this marks the third consecutive year that Vanguard has led the fund industry in net inflows.
Morningstar said that November marked the fifth consecutive month, and the eighth time in 2009, Vanguard's combined open-end and ETF monthly flows exceeded $10 billion. To put that into perspective, Morningstar said the next-closest firm to surpass the $10 billion monthly hurdle is Pacific Investment Management Co., which scored only two such months in 2009.
Most assets have gone into Vanguard's fixed-income funds. Overall, McNabb said inflows were "remarkable" in 2009 and, with the exception of money market funds, Vanguard has seen positive flows into most of its sectors. Through Nov. 30, Vanguard has attracted $40 billion to its equity funds, $1.7 billion to its balanced funds, $73 billion to its fixed income funds, and had $21 billion of outflows from its money market funds.
"It has been a record year for fixed income for the entire industry, and we have benefited because we have a great bond fund lineup," McNabb said. "The equity side has done well, but fixed is still leading the way for us."
McNabb, who became Vanguard's president in 2008, said that some of the inflow figures are misleading indicators. He said the company has had strong equity inflows this year, but a lot of those flows are through Vanguard's target-date funds. He said most people that begin contributing to a 401(k) plan are automatically placed in a target-date fund that allocates heavily to an equity or balanced fund when they are further from retirement.
"You can't take these figures to indicate that people are returning wholesale to the equity market," McNabb said. "I think that active mutual funds are the best indication of risk tolerations. Investors are still pretty cautious from a risk perspective. We are just starting to see people start to tiptoe back into equities, but it is slow, and considering what we have been through that is not really unexpected."
As a result of the financial crisis, McNabb hopes that investors have learned not just to leap from one sector to another. "I really hope investors are taking more of a balanced approach now," he said. "One of my great hopes is that investors realized that the notion of diversification works."
Analysts said Vanguard's strong inflows this year really stand out when the company is compared to its biggest competitor-Fidelity Investments. According to Morningstar, for five months in a row and for the eighth time this year, Vanguard's combined open-end and ETF monthly flows exceeded $10 billion. At the same time, Fidelity saw net outflows in October and November.
McNabb attributes the discrepancy between Vanguard and Fidelity's results to the fact that a larger percentage of Fidelity's assets are heaped in money market funds. In the first 11 months of this year, Vanguard had $21 billion of outflows from its money funds. "We are seeing money leaving money funds and moving into our bond funds," he said. "For us, we have benefited by having a diversified set of offerings and a diversified client base."
In terms of overall growth in 2010, McNabb doesn't expect a repeat of 2009, but he remains optimistic.
"Boring is still great," he said. "We certainly plan for growth next year, and we hope for it."
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